Start a budget with these steps. A budget is the itemized summary of income and expenses for a given period of time (monthly, quarterly, annually). A budget helps you visualize how much income is coming in and where your money is being spent.
Many people feel constrained by the word budget and often associate the term as limiting. Budgets are as much about mindset as they are about financial numbers. Budgeting will help you live within your means and push you towards financial success.
Why Budgeting is Important
- A budget helps you understand your cash flow (income and expenses) and gives you the necessary information to make better financial decisions.
- A budget can help you achieve many of your financial goals. Don’t think of it as limiting you from doing what you want to do. A budget is a spending plan that determines if it is affordable now or later down the road.
- A budget can help you identify areas where you’re spending money carelessly. It’ll help determine areas to stop spending, cut expenses, and save.
- A budget can decrease your stress level because you now have a financial plan of action.
Learn how to Avoid these Budgeting Mistakes
What Budgets Include
Monthly Income. You want to know how much money is actually coming in first.
Monthly Expenses. It includes a list of your monthly obligations such as mortgage/rent, loan payments, utility bills, and discretionary spending.
Financial Goals. Financial goals are monetarily quantifiable aspects of your life. They are things that can be purchased such as goods, experiences, and education. These goals are things like savings goals, homeownership, student loan payoff, or once in a lifetime trip. What are your short-term financial goals? Want to buy a home or a luxury car? Maybe you want to go on a worldwide trip or send your kids to college. Or you need to save money or pay off debt.
Examples of Financial Goals
- $1,000 in an Emergency Fund
- $10,000 for a home down payment.
- Payoff $5,000 in credit card debt in 2 years.
- A 7-day cruise costing $1500.
There are a number of ways to start a budget from the traditional to the technological. Whichever approach you take, make sure you’re committed to the success of creating, maintaining, tracking, and sticking with your budget. You can find the best budgeting app in the marketplace.
How to Start Budgeting
- Clarify your vision and set financial goals. You’ll need to have a clear picture of the type of life you want to live. Then, set financial goals related to that vision.
- Gather one month’s income sources. Get a better understanding of how much money comes in each month. Income sources come from paychecks, dividends, alimony, interest payments, etc.
- Gather one month’s expenses. List all your monthly expenses and debt obligations. Your expenses include rent, auto loan payments, utility bills, services like cellphone charges, subscriptions such as Netflix, monthly gas expenses, and ATM receipts, and any receipts for one month (dining, movies, random purchases, birthday gifts, etc).
- Create categories. Place your income into one pile. Categorize your expenses into housing, transportation, utilities, entertainment, food, discretionary, etc.
- Calculate the totals of each pile. Take a piece of paper or excel sheet and type in the information. Deduct expenses from income.
Now that you understand the importance of budgeting and gathered your documents, it’s time to use the simple 3-Step Budgeting Process.